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Judge Broadly Interprets FCPA’s Internal Controls Provision – Concludes That “Circumvention” Does Not Depend On The Falsification Of A Book Or Record

As highlighted here [1], Roger Ng (a former managing director at Goldman Sachs) was recently convicted by a jury of Foreign Corrupt Practices Act and related offenses for paying bribes to various Malaysian and Abu Dhabi officials in connection with 1Malaysia Development Berhad (1MDB), Malaysia’s state-owned and state-controlled investment development company.

As discussed here [2], in September 2021 Judge Margo Brodie (E.D.N.Y) denied Ng’s pre-trial motion to dismiss. Among the arguments Ng made in the motion to dismiss was that a count in the indictment should be dismissed because the DOJ failed to that Ng conspired to circumvent a set of internal accounting controls cognizable under the FCPA. As to this issue, Judge Brodie concluded that the FCPA’s internal controls provisions can be implicated even in transactions in which an issuer does not use its own assets to pay an alleged bribe.

During the trial, at the conclusion of the government’s case, Ng moved for a judgment of acquittal of the charge and Judge Brodie denied the motion on the record on March 28, 2022. Recently, Judge Brodie issued this Memorandum and Order [3] explaining her decision.

Judge Brodie’s decision begins with summarizing the evidence at trial and states (internal citations omitted):

“At trial, the Government presented evidence that the bond deals Goldman arranged and underwrote for 1MDB required the authorization of Goldman’s Firmwide Capital Committee and Firmwide Suitability Committee. The Government also presented evidence that Goldman Sachs had an internal accounting control that addressed the risk of unauthorized deals and that required that the “Deal Captain” on a deal “receive appropriate approval and authorization before execution.” Committee members testified about facts that the committee would need to know in considering whether to authorize the transactions, including:

(1) the identities of any intermediaries or key decisionmakers for 1MDB, even if they did not hold an official position with 1MDB; (2) that 1MDB would make a significant monetary payment, in addition to awarding options, as consideration for IPIC’s guarantee of the bonds; (3) that certain deal team members had a personal financial interest in the transactions; and (4) that the approval of the deals by officials in Malaysia and Abu Dhabi was procured through bribery. “Leissner testified that he and [Ng] did not disclose these facts because they knew that, if they told the truth, the committees would not authorize the transactions.”

Next, Judge Brodie summarized Ng’s argument as follows (internal citations omitted):

“Ng argues that the Government has read the word “accounting” out of the “internal accounting controls” provision, and contends that if this word is to be given any effect, it is clear that internal “accounting” controls are “a limited and defined set of controls” that are “only one aspect of a company’s total control system” and that are to be distinguished from legal, risk-management, compliance, and other controls. Ng also argues that the provision’s legislative history supports his interpretation because a Senate report indicates that the internal accounting controls provision was a response to the historical problem of companies “play[ing] games” with their own books and records in order to be able to pay bribes, in the recognition that, “[i]n the past, corporate bribery ha[d] been concealed by the falsification of corporate books and records,” In support of this argument, Ng quotes the Senate’s report and argues that “[b]ecause the accounting profession ha[d] defined the objectives of a system of accounting control, the definition of the objectives [in the statute was] taken from the authoritative accounting literature,” and therefore “[w]hat is required to define, understand, implement and assess an ‘internal accounting control’ under the FCPA is a matter of accounting and auditing, and not broadly a legal, compliance or other controls matter.”

Ng urges the Court to look to the interpretation of section 78m(b)(5) adopted by the U.S. Securities and Exchange Commission (the “SEC”) and argues that the SEC explicitly rejected a broader definition of “internal accounting controls over financial reporting” under the Sarbanes Oxley Act, which requires public companies to maintain “internal control over financial reporting” that provides “reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles,” noting that its definition was “consistent with the description of internal accounting controls” in the FCPA’s internal accounting controls provision. In addition, Ng argues that the Government’s broad interpretation of the internal accounting controls provision “is unsupported by prior civil cases that have interpreted the exact same statute in SEC matters.”

Based on his interpretation of the statute, Ng argues that the Court must grant his Rule 29 motion because (1) the Government failed to present evidence that any accounting controls were violated, as there is “no evidence” that the alleged conduct in this case had any impact on the accuracy of Goldman’s accounting or financial reporting as an issuer of securities; (2) there is no violation of the FCPA because there is no dispute that the transactions were authorized by the appropriate committees and executed in accordance with that authorization; and (3) if the Government’s broad theory is accepted, “[a]n enormous swath of conduct, never contemplated by Congress, would be swept within the ambit of the FCPA,” rendering section 78m(b)(5) constitutionally vague as applied.”

[4]

Judge Brodie summarized the DOJ’s argument as follows (internal citations omitted):

“The Government’s “theory is that [Ng] conspired to circumvent Goldman’s internal accounting controls by obtaining authorization [of the bond deals] from [Goldman’s] Firmwide Capital Committee and . . . Firmwide Suitability Committee through providing false information to, and withholding accurate information from, the committees.” The Government argues that, because subsections (i) and (iii) of the internal accounting controls provision “plainly designate[] management authorization of transactions and access to assets as part of a system of internal accounting controls, the [G]overnment has properly relied” on these committees’ “authorization of the 1MDB bond deals in presenting its case.” Focusing on the common meaning of the word “circumvent” — which is “to manage to get around especially by ingenuity or stratagem” — the Government further argues that the statute “plainly reaches circumvention through acts of deception.”

The Government also argues that the statute’s legislative history supports its interpretation of the statute because (1) the Senate’s 1977 report on the internal accounting controls provision “underscore[d] the importance of ‘management’s stewardship responsibility’ and the need both ‘to provide shareholders with reasonable assurances that the business is adequately controlled’ and ‘to furnish shareholders and potential investors with reliable financial information.’” In addition, the Government argues that, in adding a scienter requirement to the statute in 1988, Congress intended for criminal penalties to apply to “conduct calculated to evade the internal controls requirement,” and to read the statute as Ng suggests, such that “‘circumvent’ has a cabined meaning that does not include obtaining authorization through fraud or deception,” would lead to absurd results, as it would encourage such conduct.”

Judge Brodie concluded that “the plain language of the statute encompasses the conduct in this case” and stated in pertinent part (internal citations omitted).

“The statute requires issuers to “devise and maintain a system of internal accounting controls.” Although the statute does not define “internal accounting controls,” and while the Court could read these words in isolation and interpret the statute to apply only to a limited subset of controls specifically related to accounting, a literal reading of the statute, in its entirety, would be inconsistent with such a narrow reading. The statute defines an adequate system of internal accounting controls by reference to the objectives of such a system, and the plain language of the statute indicates that such systems are intended not only to provide reasonable assurances of accurate internal accounting for purposes of external financial reporting, as addressed by objectives (ii) and (iv), but also to provide reasonable assurances that the company is adequately controlled, as addressed by objectives (i) and (iii), under which the Government is proceeding against Ng. Objectives (i) and (iii) indicate that the system of controls must include controls that will reliably ensure that transactions are executed, and access to assets is permitted, in accordance “with management’s general or specific authorization.” As the facts of this case demonstrate, “circumvention” of such a system does not depend on the falsification of a book or record — which the statute specifically addresses in a separate provision. Rather, subsections (i) and (iii) are aimed at ensuring the effective discharge of managements’ stewardship responsibility, and they explicitly contemplate that an attempt to circumvent management’s informed authorization for transactions and access to assets may violate the statute.

Thus, applying the law as the Court understands it to the evidence presented, and viewing the evidence in the light most favorable to the prosecution, the Court cannot conclude that the evidence is insufficient to sustain a conviction. A rational trier of fact could find the essential elements of the crime beyond a reasonable doubt.”

In a footnote, Judge Brodie noted that the four objectives of internal controls as stated in the statute are joined by the conjunctive “and” that therefore “issuers must devise and maintain a system of internal accounting controls that meets all four objectives.” However, she further stated that section 78m(b)(5) of the statute which makes it a crime for any person to “knowingly circumvent or knowingly fail to implement a system of internal accounting controls” does not require a person to violate controls related to all four objectives. Judge Brodie states that “an attempt to circumvent controls related to any objective is an attempt to circumvent part of the system.”

Judge Brodie next concluded that the internal controls provisions as applied to Ng were not vague. She stated as follows (internal citations omitted):

“Ng argues that, if the statute is interpreted as the Government suggests, to include conduct that does not have a “proven effect on . . . financial statements,” then it is “void for vagueness as applied” to him. In support, he argues that a statute is void for vagueness “if its prohibitions are not clearly defined,” and that if the Court looks “to the dictionary definition of the term ‘accounting,’ as well as to the ‘widely-accepted core meaning’ of the term ‘accounting,’” it will conclude that an “internal accounting control” is “a control that directly relates to the preparation and accuracy of financial statements,” To conclude otherwise, Ng argues, “would potentially criminalize vast — and indefinite — amounts of activity,” such as his use of personal email accounts at work, such that public companies’ “businesses and employees could find themselves indicted” for compliance violations that have “nothing to do with the company’s financial statements or accounting,” which would be “contrary to the words of the law, the legislative history of the law, and prior decisions interpreting the law.”

The Government argues that Ng’s hypothetical examples can be set aside “in the context of an as-applied challenge,” as “the facts of this case bear no resemblance to those hypothetical scenarios.” In support, the Government argues that, “[u]nlike the examples hypothesized in [Ng’s] brief, the information [he] withheld from the Firmwide Capital Committee and the Firmwide Suitability Committee . . . included the involvement of an exceptionally high-risk individual with whom the firm had previously refused to do business, the fact that bond proceeds would be used to pay hundreds of millions of dollars in bribes to foreign officials in both Malaysia and Abu Dhabi, and information that materially changed the economic structure of the deal.” Therefore, the Government argues, “[e]ven if there were a line to draw regarding the statute’s reach[,] . . . it need not be drawn in this case.”

To ensure that persons are not denied liberty without due process, “the void-for-vagueness doctrine requires that a penal statute define the criminal offense with sufficient definiteness that ordinary people can understand what conduct is prohibited and in a manner that does not encourage arbitrary and discriminatory enforcement.”  “The ‘void-for-vagueness doctrine addresses concerns about (1) fair notice and (2) arbitrary and discriminatory prosecutions.’”

“Under the ‘fair notice’ prong, a court must determine ‘whether the statute, either standing alone or as construed, made it reasonably clear at the relevant time that the defendant’s conduct was criminal.’” “This requirement assures that statutes do not ‘lull the potential defendant into a false sense of security, giving him no reason even to suspect that his conduct might be within its scope.’” “Statutes need not, however, achieve ‘meticulous specificity,’ which would come at the cost of ‘flexibility and reasonable breadth.’”  “[T]he more important aspect of [the] vagueness doctrine ‘is not actual notice, but [the arbitrary enforcement prong],” which “requires that a statute give ‘minimal guidelines’ to law enforcement authorities, so as not to ‘permit a standardless sweep that allows policemen, prosecutors, and juries to pursue their personal predilections.” In deciding the adequacy of these guidelines, the Second Circuit has held that a court can uphold the statute on two alternate grounds:

(1) that [the] statute as a general matter provides sufficiently clear standards to eliminate the risk of arbitrary enforcement or (2) that, even in the absence of such standards, the conduct at issue falls within the core of the statute’s prohibition, so that the enforcement before the court was not the result of the unfettered latitude that law enforcement officers and factfinders might have in other, hypothetical applications of the statute.

“Outside of the First Amendment context, [courts] look to whether the ‘statute is vague as applied to the particular facts at issue.’” “The vagueness issue on an as-applied challenge is not whether the statute’s reach is clear in every application, but whether it is clear as applied to the defendant’s conduct.”

In view of the facts presented at trial, the Court cannot conclude that the internal accounting controls provision is vague as applied. As discussed above, the statute’s text provides fair notice that a conspiracy to circumvent internal controls related to management’s authorization of transactions and access to assets is a criminal offense. An ordinary person would understand that conspiring to withhold critical information and provide inaccurate information to Goldman’s Firmwide Capital Committee and Firmwide Suitability Committee in order to procure their authorization for the bond deals in this case would constitute unlawful circumvention of Goldman’s internal accounting controls. Although Ng argues that the common meaning of the word “accounting” limits the statute to the preparation and accuracy of financial statements, and that a broader interpretation is contrary to prior caselaw and his hypothetical examples, the Court has concluded, based on a literal reading of the statute, that it has a broader reach, and, as the Government argues, the scenarios Ng relies on have limited relevance in the context of an as-applied challenge.

In addition, in setting forth the objectives of a system of internal accounting controls, the statute provides, “as a general matter,” the necessary “minimal guidelines” to avoid arbitrary law enforcement. The statute does not sweep so broadly as to criminalize the “most basic compliance violation,” such as the use of a personal email address at work, as Ng suggests. Rather, as the Government argues, there is ample evidence that Ng agreed with Leissner and others “to conceal material facts from [Goldman Sach’s internal] committees in order to obtain their approval,” including the involvement of Low, with whom the firm had previously refused to conduct business several times, Low’s decision-making role at 1MDB, and the bribery scheme, knowing that the committees would not have approved the bond deals “if they were presented with full and accurate information.”  Based on the statute’s applicability to knowing and willful circumvention of internal accounting controls, including controls related to management’s authorization of transactions and access to assets, the statute is not unconstitutionally vague as applied to this conduct.”

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